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October 24, 2012

In Poll, Most Economists Say Bernanke Has Gone Too Far With QE

Policy could contribute to more volatility, says Putnam’s Knight

As the Federal Reserve met in Washington on Wednesday, a majority of economists believed Chairman Ben Bernanke would continue with the latest round of quantitative easing through the end of his term in January 2014. They also believed the Fed had “gone too far” in its quantitative easing and that it was unlikely to do much to boost the economy.

Sixty-eight percent of economists polled by Bloomberg said the Fed chairman’s third round of quantitative easing will last until late next year or beyond, creating a median estimate of 116,000 jobs over the course of 2013. Most surveyed economists believe Bernanke has gone too far with quantitative easing, with 55% saying policy is too easy, compared with 48% who said so in a Sept. 7-10 survey.

“The recovery in the labor market is probably going to be more sluggish than the Fed recognizes,” Michael Hanson, senior U.S. economist at Bank of America in New York and a former Fed economist, told the news service. He said policymakers have “painted themselves in a bit of a corner, waiting to see a significant improvement in the labor market.”

The FOMC's annoucement after their meeting on Wednesday affirmed the Fed's QE3 policy, offering no changes, while stating, “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

In a related story, Joseph Stiglitz (right), Columbia University’s high-profile professor of economics, told Bloomberg, “the likelihood that monetary policy will bring us back to anything close to normal is zero. QE1 didn’t work, QE2 didn’t work and I think there is very little hope QE3 will work.”

When queried as to whether or not the Fed has a choice in introducing another round of quantitative easing, given the poor state of the economy, he said, “the Fed obviously has a choice, but it wants to be seen as doing something. After all, [Bernanke] should feel guilty, because the Fed’s policies have led to the financial crisis. So I think they have a lot of guilt on their shoulders.”

The Fed’s QE3 policy could contribute to more market uncertainty, adds Jeff Knight, head of global asset allocation with Putnam Investments.

“The challenge of executing [QE3] may cause volatility for stocks and bonds,” Knight wrote in the firm’s fourth-quarter outlook on Wednesday. “The central banks’ plans for printing money to buy bonds from national governments running huge deficits cannot be considered a long-term solution to debt problems.”

Investors should focus on two alternative scenarios, he advises. The first is that the policy overstays its welcome. In this case, expect a sharp decline in the purchasing power of all “this newly printed fiat money, with inflation mounting, perhaps significantly, in due time.”

The other scenario, one Knight calls “more optimistic,” is that monetary policy reverses before inflation surges.

“Consider this,” he concludes. “Will there be demand for the bonds that central banks will need to sell, or the ones that central banks will no longer be buying? If the impact of this quantitative easing is so helpful to markets now, won’t its reversal be equally hurtful? We are wary in the long term of both the unintended consequences of these policies as well as the prospect of their ultimate reversals.”

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